Small biz owners now have more time to use their PPP loans. Here’s what else you need to know

The rules small business owners need to follow in order to get their federal loans forgiven were recently made more lenient under the Paycheck Protection Flexibility Act.

This week Treasury and the Small Business Administration released a streamlined forgiveness application form to reflect the rule changes. And they also put out an “EZ” form for self-employed borrowers who have no employees and for small businesses that didn’t reduce employees’ pay by more than 25% and didn’t reduce the size of their staff or their employees’ hours.

One of the biggest concerns with the program’s original forgiveness rules was that they hamstrung business owners in terms of when and how they could use the money if they wanted their loan to qualify for full forgiveness. Those who had gotten loans prior to early June were told they had to spend the money in the first eight weeks and use at least 75% of it for payroll expenses — even though many businesses weren’t even open during that period or were not operating at full capacity.

Now they have more options.

That’s a relief to bar owner Rick Schmutzler, who had told CNN Business last month that he wasn’t going to spend his loan in ways that weren’t smart for his business just to get forgiveness. “I’ll give ’em credit – they listened, they acted pretty quickly and I believe they got it right. This addresses any substantial issues we had,” Schmutzler said.

Here are the key ways the new rules give business owners greater flexibility:

More time to spend the money: Instead of eight weeks, borrowers now will have 24 weeks from the day they get their PPP funds to use them.

Less money must be dedicated to payroll: To qualify for full forgiveness of their loans, borrowers now must allocate at least 60% of their PPP funds for payroll expenses and may use the rest to pay for overhead costs, such as rent, mortgage interest and utilities. This change will help small businesses operating in high-rent areas. If a business owner spends less than 60% on payroll she may still qualify for partial forgiveness. The same principle applied under the old rules but the threshold percentage was less than 75%.

More time to rehire staff: To qualify for full forgiveness under the old rules, business owners had to maintain the average number of employees they had on staff as of Feb. 15 and pay them at their same rate. Or they at least had to meet those criteria by June 30. The new rules extend that safe-harbor date to Dec. 31.

Full forgiveness also may be available when a business can’t hire back their full staff under Covid-related workplace safety requirements mandating that they operate at less-than-full capacity.

More time to repay: Under the old rules, any portion of the loan that was not forgiven had to be paid back within two years. That has been extended to five years for loans made on or after June 5. For owners who got their loans before June 5, they can make an agreement with their lender to extend their repayment period, said Veena Murthy, a principal at accounting firm Crowe LLP.

Who benefits? Who doesn’t?

The new rules certainly can benefit small business owners who have not yet closed on a PPP loan. The good news is that the program still has close to $130 billion left, per the Small Business Administration’s latest count. But June 30 remains the last day by which a PPP loan application can be approved. So anyone who hasn’t applied yet should do so soon.

But the new rules likely will not benefit small business owners who received their PPP loans early and have spent most — if not all — of their funding in accordance with the old rules.

And how about small business owners who already got their PPP loans but haven’t spent the bulk of the money yet? They likely will benefit.

For all small business owners with PPP loans, the issue of forgiveness has been the most vexing. While the new rules ensure more people are likely to see their loans forgiven in full, lenders and small business advocates say even the streamlined loan applications still require too much work for already burdened small business owners to show they’ve met all the criteria.

The CBA and others have been advocating for automatic forgiveness of all loans under $150,000 — which accounts for roughly 85% of the loans made so far, but only 26% of the funds lent out so far. Such a move would save more than $7 billion and 70 million hours of labor, the CBA estimates.

In the meantime, small business owners with concerns or questions about how the new rules apply to them should consult with an accountant, lawyer or lender.